(KR) Continuing Jobless Claims Fall

January 14th, 2010

The initial claims for unemployment insurance report was a mixed bag. The numbers are always a bit flaky around the holiday season, so there will still be a fair amount of uncertainty about the real state of the job market for at least a few more weeks.

Initial claims rose by 11,000 to 444,000 last week. However, the 4-week moving average — which takes out some of the big volatility in the week-to-week numbers, and is even more important than normal around the holidays — fell by 9,000 to 440,750.

While it is not a good thing to see initial claims rising, one should step back for a minute and look at the longer-term trend, which is shown in the graph below (from http://www.calculatedriskblog.com/). The 4-week moving average has been in a steep downtrend since hitting a peak of 658,750 in mid-April. We are also well below the 523,750 level of a year ago.

Unlike the last two recessions, there has been no sign of forming a high plateau after the initial jobless decline. Historically, we have started to on balance start adding jobs to the economy when the level of initial claims falls to around 400,000.

Of course, the total population is higher now than it was in previous downturns, so the job creation level of initial claims might be a little bit higher, but probably not dramatically so. In other words, the data suggests that we are getting close to adding jobs, but are probably not there yet.

Of course, there is not an exact one-to-one correlation between claims and job creation. After all, the initial claims level was lower in December when the economy lost 85,000 jobs than it was in November, when after the revision we gained 4,000 jobs. It is more suggestive than determinative, since initial claims only focus on half the picture: the number of people losing their jobs.

In any economy — boom, bust or depression — there will always be some jobs being added, and some being lost. It is the net number that shows up in the monthly employment report. Right now, the evidence suggests that we have stemmed the bleeding on the job-loss side, but have yet to jump-start the job creation side.

That explains why the duration of unemployment numbers are off the charts, with half of all of the unemployed now out of work for 20.5 weeks or more, up from 10.7 weeks a year ago, and a long-term average of 7.4 weeks. Prior to this downturn, the highest the median duration of unemployment had ever reached was 12.3 weeks, in May of 1983.

However, we might be seeing a little bit of good news on that front, but the caveat about the flakiness of the numbers around the holidays still applies here. Continuing claims for unemployment, which are the regular state benefits that run out after 26 weeks, fell by 211,000 last week (well, technically a week ago; the continuing claims numbers are a week behind the initial claims numbers, and the extended claims numbers are a week behind the regular continuing claims numbers) to 4.596 million.

While this is still above the 4.487 million level of a year ago, it is down very sharply from the peak of 6.904 million set in late June. However, given the extraordinary unemployment duration levels of this cycle, it is a serious mistake to look at continuing claims in isolation. After 26 weeks, regular state benefits run out — and a measure that systemically excludes the 40% of the unemployed that have been out of work for more than 26 weeks is a not a very complete measure.

After regular state claims run out, then extended benefits, paid for by Federal ARRA (stimulus package) funds kick in. Combining the two largest programs, they totaled 5.304 million, or more than the regular continuing claims level. The good news is that they fell by 136,000 in the last week, but that was coming off a record high. A year ago, extended claims were 1.669 million.

Those extended claims are an effective form of stimulus, in that the money people get allows them to continue to buy their groceries from Kroger’s (KR) rather than having to rely on the local food bank. That keeps people working at Kroger’s on the job. People can afford to also buy basics from Wal-Mart (WMT) or Big Lots (BIG), keeping their employees on the job, as well as the people who make and transport the goods sold. True, some of that money eventually slips abroad if the goods bought are imported, but there is still an overall stimulative effect.

The humanitarian benefits are obvious. Those 5.3 million people would be left with no income at all in the absence of the extended benefits, and with job seekers outnumbering job openings by better than six to one, it’s not like there are a lot of other options open to people.

While it would be good to see Consumption as a share of the overall economy decline (it was at a record high in the third quarter), I don’t think we want to see that happening due to more than 2% of the total population consuming nothing and starving to death. That might goose investment in security items and be good for the sales of Sturm Ruger (RGR), but it would not be good for the society.

Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market-beating Zacks Strategic Investor service.

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(KR) Continuing Jobless Claims Fall

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